When the Government Outsources to Private Companies, Inequality Gets Worse

State and local officials nationwide are responding to budget crunches by siphoning off public services to private contractors – the classic “market-based solution” for a fiscal crisis. But on balance, the savings of these supposedly cost-saving outsourcing measures often turn out to be less than advertised. A new report from the Colorado Center for Policy Studies out of the University of Colorado outlines the true price of outsourcing government functions like sanitation and healthcare: weakened social infrastructure, deepened economic inequity and hollowed-out civic institutions.

Contracting out a service, like managing bridge tolls or a healthcare website, might make financial sense on paper for a state or local government. And certainly, the recession has produced real fiscal pressures on local policymakers. But the study’s analysis of patterns of contracting and privatization nationwide shows that in many cases, when officials turn to private firms to serve the public on the cheap, hidden costs surface eventually in the form of economic decline, mismanagement and poor quality of services. The benefits of this kind of “private-public partnership” largely accrue to contractors, while communities bears the costs of insufficient oversight and limited public control over the use taxpayer resources.

In contrast to the neoliberal rhetoric touting the efficiencies of privatization and injecting “free enterprise” into government, when providing critical public services, lower inputs often lead to worse results.

An analysis of the outsourcing of public healthcare in several hundred counties found that “Although primary care hours and access increased, the quality and quantity of wellâ€baby care and homeâ€care for the elderly fell. Costs of providing care did fall, but at the ‘price’ of less access and quality in some critical areas.”

When Shelby County Schools in Memphis contracted out janitorial services, what was supposed to be a more cost-effective labor arrangement collapsed when principals complained that that their schools were “not being cleaned properly,” and the contract workers complained that they had been shorted on pay. In the process, 750 school jobs were lost for a “cost cutting” contract that in the end, cheated workers and the community.

And private contractors often perpetuate regressive public policy. The outsourcing of incarceration to private prison-service companies, for example, has constrained public oversight over prisons and given the politically influential prison industry a perverse incentive, subsidized by taxpayer funds, to perpetuate mass incarceration nationwide.

Daphne Greenwood, economics professor and director of the Colorado Center, tells The Nation that many contract deals hover in a “halfway land” between private incentives and public interests, and ultimately, “might not give you the benefits of either.” While outsourcing might be billed as a market-oriented cost-control measure, ultimately, “The service is still paid for by taxpayers, and once you contract with some group, they’ve got a monopoly on it…. They’ve got this guaranteed source of customers.” Yet for the public whom these deals are supposed to benefit, she observes, “there isn’t the competition we associate with the ‘free market,’ and there isn’t the transparency and accountability we expect from government.”

The sources of hidden costs range from incompetent administration to rampant fraud. Sometimes spending balloons unexpectedly because of mismanagement or waste, and sometimes companies deliberately promise more than they can deliver in order to secure a long-term contract.

In addition to the extra burden on taxpayers, much of the underlying social cost falls on workers. While some may see their jobs eliminated altogether, outsourcing is also in many cases linked to higher turnover and economic instability. These social disruptions then aggravate the very budget problems contracting is supposed to solve: tax bases crumble, leading to disinvestment from institutions like schools, hospitals and public transit. Over time, workers might go from working as public servants, with solid union jobs, to depending on underfunded welfare programs.

And jobs produced by contracting deals may lead to further exploitation. The report cites a Senate investigation showing that “almost 30 percent of the top violators of federal wage and safety laws are also current federal contractors.” Washington’s willingness to do business with unscrupulous companies should raise ethical questions for state and local officials who seek to “partner” with contractors, potentially at the expense of their constituents’ livelihoods.

Economic decline for workers translates into decline across the local economy. The report notes that privatization of a once-public workforce might expand inequality and hinder long-term social mobility, because administrators typically demand higher compensation under the private contractors, while lower-ranked workers are worse off.

Meanwhile, some contracted jobs go to people who do not even live in the community. An economic case scenario presented in the report noted that, after outsourcing to non-local workers and managers, “dollars spent in the local economy annually fall from 49 percent of total payroll to 9.5 percent, simply because of where the workers live.”

Just as bringing Walmart into a town’s economy squeezes local business, contracting with a large conglomerate can rupture the community’s economic landscape. Mom-and-pop businesses that used to serve as vendors to government agencies, according to the report, “are less likely to continue to supply a contractor that is part of a large national or regional corporation.” And as residents suffer from lower incomes, “more workers may shop at ‘big box’ discount stores than did before, and fewer with local merchants.”

While taxpayers may get little return on investment from profiteering contractors, the private sector wins big on two fronts: by effectively replacing the government as the boss, they gain greater control and political influence. On the business side, corporations then profit by marketing to the low-wage consumers that they helped impoverish.

In decisions on whether to keep public duties “in house” or transfer them to private hands, the report recommends that governments should not be driven only by immediate budget or political pressures, but fully analyze the broader consequences of contracting. In Greenwood’s view, officials should have systematic policies for considering the potential ripple effects for communities, including effects on governance and the local economy, “rather than just buying into the ideology that [the] private sector is more efficient, or thinking that ‘competition’ is going to solve the problem. Because there won’t really be competition, once the contract is signed.”

The privatization of government is both accelerating and broadening to key public institutions.Even in education, along with the contracting out of logistical functions, like cafeteria services, the aggressive expansion of privately managed charter schools has fueled the corporate presence in public schools. Institutions once directly accountable to taxpayers and education officials are now beholden to mammoth philanthropists and corporate education service vendors.

The rush to outsource government services chips away at one of our last vestiges of some form economic democracy. For embattled public workers, this entanglement with private corporations feels more like cannibalism than “partnership.”

Michelle Chen is a contributing editor at In These Times. She is a regular contributor to the labor rights blog Working In These Times, Colorlines.com, and Pacifica’s WBAI. Her work has also appeared in Common Dreams, Alternet, Ms. Magazine, Newsday, and her old zine, cain.